When the mafia extorts money from you to allow you to live, they call it "protection money." When the government does it, they call it "consumer protection." Either way, you are paying for protection from someone who has the power to take everything you have.

Tuesday, May 31, 2011

The on going battle over the confirmation (or not) of Elizabeth Warren as the permanent head of the

Consumer Financial Protection Bureau heated up a lot at the end of last week. The left, as embodied by a coalition of progressives, want Warren confirmed as the head of the CFPB. The CFPB officially takes power July 21, and though Warren has been unofficial interim director for a year, she has never been confirmed because she has never had enough support in the Senate to survive the confirmation hearings.

With that in mind, left wing supporters last week launched an online petition to encourage the White House to use a recess appointment to appoint Ms. Warren to the head of the CFPB. Presumably, the Senate would be on a one week recess for Memorial Day, and that would give the White House the opportunity to appoint Warren without going through the confirmation process. Warren is very popular among anti-business interests, and in fact her progressive supporters say that they have 150,000 signatures on a petition urging Obama to appoint her as head of the CFPB.

The Huffington Post quoted Stephanie Taylor, co-founder of the Progressive Change Campaign Committee, as saying, "Since Republican senators said they wouldn't confirm anyone that the President nominates, he has no choice but to make a recess appointment...So we're showing him that there's broad public support for Elizabeth Warren."

Recess appointments have become just one more means of circumventing a constitutional process of checks and balances that our founders set in place. Rather than allowing nominees to go through the process of being vetted and confirmed by the Senate, Presidents tend more and more to wait for the Senate to take a vacation so that they can push through their own nominee.

This time, however, the Senate is fighting back. On Thursday, Senators David Vitter, (R LA) and Jim Demint (R SC) sent a letter to house speaker John Boehner (R OH) urging him not to approve a Senate recess. Eighteen other Republicans signed the letter as well. Neither chamber of Congress can go into recess unless both chambers approve doing so. "Given President Obama's indifference to the Senate's constitutional authority and the American people's right to scrutinize his appointees through regular order of advise and consent, we urge you to refuse to pass any resolution to allow the Senate to recess or adjourn for more than three days for the remainder of the President's term."

At the same time that Boehner was being pressured not to allow the adjournment, Senator Jeff Sessions (R-Ala) said that he would not agree to a unanimous consent request to allow the Senate to adjourn. Although Boeher is being very quiet on the extent of his involvement, on May 27 the Senate announced that it will hold pro forma sessions all week. The announcement lead Vitter to issue the following statement: "Thanks to the leadership of Speaker Boehner we won't have a formal adjournment that would allow for far-left Obama recess appointments. Obama has already overreached far too much with unauthorized czars and the like. I'll continue to push for this strategy for every recess."

A Justice Department briefing from the Clinton era suggested that if the Senate is not in session for more than three days, it can be considered in recess. Therefore, the Senate will hold pro forma sessions May 27, May 31, and June 3rd. However, these sessions can last only minutes at a time so as not to disrupt the Senators' vacations.

Obviously the issue of who will head the Consumer Financial Protection Bureau is of extreme importance. Republicans have promised that they will veto any nominee the President brings forward until the basic structure of the CFPB is changed from a one person director to a board with more accountability.

Blocking Warren's appointment is a very good start. If Warren is not appointed, there are a lot of rumors that she may run for Scott Brown's Senate seat in 2012. And, according to the Huffington Post, this might actually benefit Democrats more than her appointment to the CFPB, since the idea of Warren at the helm of one of the most powerful agencies our government has ever created is unnerving to "high powered Democratic donors on Wall Street, who might otherwise wind up in Warren's crosshairs."

Whether Warren runs successfully or unsuccessfully for the Senate seat from Massachusetts, Republicans need to refuse to confirm any nominee to the CFPB. But rather than looking to restructure this agency, we need to be looking for a way to dismantle it. The CFPB represents too much power in too few hands, whether we are talking about one director, a five member board, or a twenty-five member board. This is a massive expansion of government that should not be allowed to move forward.

Friday, May 27, 2011

"A friend in need is a friend indeed," goes the old expression. And this Memorial Day weekend, many Americans across this country are in need. They may not be our personal friends, but they are certainly our neighbors as Americans and citizens of this great country.

Earlier this week, a tornado hit Joplin, Missouri which killed approximately 130 people and destroyed 1/3 of the town. Since Joplin is within 30 miles of the tiny town where my grandmother lives, I was watching the storm activity very carefully. While I was saddened, as most Americans were, to see the loss of life and loss of property caused by the storm, I have been heartened to see the help that many Americans have furnished to the people of Joplin. I have heard stories of people from as far away as New York taking a few days off work to go to Joplin and hand out water and supplies. A number of Christian ministries which are headquartered close to Missouri have also dispatched workers to aid to the people of Joplin.

I was especially distressed to find out this week that the majority of the damage may not be covered by insurance, so I did some research to find out why. It turns out that in the most heavily tornado prone states, large number of homeowners do not carry hazard insurance with wind coverage. According to to an AP story posted May 26, 2011, about 10.5% of owner-occupied homes in Missouri do not carry hazard insurance. About 4% of the residents of Alabama, Georgia, Kentucky and Tennessee do not carry hazard insurance. In Arkansas and Mississippi the percentage of ininsured homeowners is much higher--30% of homes in Arkansas and Mississippi do not have hazad insurance policies. The reason--many of the homes have been inherited and passed down from generation to generation. Since they do not have mortgages, insurance is not required, and since the structures are old and often have not been updated, the houses may be very expensive to insure or actually uninsurable. According to Census Data, thirty percent of homes in Missouri are owned free and clear, and 43% and 41% of the homes in Mississippi and Arkansas, respectively, do not have a mortgage.

That means that victims of natural disasters such as the ones we have just witnessed have to turn to the government for help. FEMA is authorized to pay approximately $30,000 to homeowners for temporary housing and replacement housing. Homeowners can also seek help from the SBA in the form of loans. This actually is a good option for credit-worthy borrowers. One of my regular clients took advantage of an SBA loan when her home was damaged by the 2006 flooding in El Paso, Texas. The SBA provided a low interest rate loan which allowed her to make the repairs and amortize them over a period of time.

So what are the people of Joplin to do? President Obama has declared the area a natural disaster, and Congress is authorizing an extension for natural disaster relief funds so that the victims of the tornado can get help. Congressman Roy Blunt (R. MO) has promised his district all of the help that they need, although House Majority Leader Eric Cantor (R VA) said publicly this week that any relief funds for Joplin needed to be offset by spending cuts elsewhere. Cantor's remarks were immediately criticized by Democrats and some in his own party. While this makes a good political football, Cantor is not totally off target here--surely the funds needed to help Joplin can be reallocated from somewhere else so that the residents of Joplin can get the help that they need and we can still have a balanced budget.

Of course, Joplin is just the latest area to be hit by a natural disaster. Earlier this month, rising flood waters forced the U.S. Army Corps of Engineers to open the Morganza Spillway, flooding more than 18,000 acres of farmland in Lousiana. And there have been reports that much of the damage from the flooding may not be covered by flood insurance. There are two sides to the flood insurance problem. First, a large number of residents of Lousiana apparently don't carry flood insurance since they are not in designated flood zones. Second, those who do carry flood insurance may not be able to collect on their policies since the disaster was "man made". Lousiana Agriculture and Forestry Commissioner Mike Strain is pressuring the U.S. Department of Agriculture to designate the opening of the spillway as a natural disaster, which will require that the claims be paid. (Of course, that will not help those who were not insured in the first place.)

Regardless of whether the opening of the Spillway was avoidable or not, the decision to open the Spillway and flood the community was one made by a government agency. Since that is the case, the government should have to pay the claims and reimburse those who did not have flood insurance but were flooded anyway. If a private corporation flooded 18,000 acres of land for "the greater good" they would be sued into oblivion, but before that happened, FEMA, the USDA, and any number of other agencies would be knocking down the doors of their corporate headquarters levying fines and demanding restitution for the victims. (Does anyone remember BP?) Just because Uncle Sam made the decision to open the Spillway does not mean that he should be exempt from paying for the damage caused by doing so.

While we pray for the victims of all of the natural disasters, we have to be very careful of the political wranglings that can come out of a season such as this one. With so many ininsured homeowners seeking help from FEMA and the federal government, there are rumblings of a national mandate to purchase property insurance, flood insurance and windstorm insurance. Dodd Frank creates a national Office of Insurance which consolidates supervision over all forms of insurance, except health insurance, into a new federal agency. And that means that we could see a huge battle beginning to percolate over mandated property coverage just as we saw a huge battle last year over mandated health insurance coverage.

The main reason that homeowners cited for not having property insurance in the AP story is the cost of the premiums. One couple, Tammy and Kevin Cudy of Joplin, had previously had insurance on their home but in August of last year they dropped the policy after Kevin lost his job because they could no longer afford the $50.00 a month premiums. If the Cudy's and others like them could afford the insurance, I am confident that they would purchase it. So perhaps the answer is to allow more, competing insurance companies into these states who could offer insurance at lower premiusm. And perhaps for all but the lowest income families, the help that is needed could come in the form of low interest loans rather than government grants. But mandating insurance coverage for all homeowners in order to spread the cost around more evenly, in the hopes of reducing premiums and preventing FEMA from paying excessive claims is just Obamacare, the sequel. It will make the cost of homeownership more expensive, and force families who inherited their homes out of their properties if they cannot pay the premiums. What has happened in Joplin and in Lousiana is tragic, but using the tragedy as an excuse to seize more government control over private citizens and potentially force many more people out of their homes is a disgrace.

Wednesday, May 25, 2011

Last night I attended a reception for a graduating class of budding female entrepreneurs who are part of the Innovate El Paso program. The program is designed to identify women with post graduate degrees and dreams of owning and growing their own businesses. During the course of the reception, I saw an acquaintance who runs her own consulting firm, and she asked me how the mortgage business was going. She was surprised when I told her that the Dodd Frank regulations are shutting down the independent loan originators. "At the end of this process, people are getting to be getting their mortgage loans through major banks--Wells Fargo, Chase, BofA, and a few others if everything keeps on as it is today," I told her.

She looked a little smug and asked, "Well what about the community bank?" naming one particularly strong local bank where both she and I have relationships.

"They have already closed their mortgage department because they don't want the liability of all of the new regulations," I responded.

The bank we were referring to is locally-owned in El Paso and has posted on its website that it has just won a 1st place ranking from SNL Financial as the single best-performing community bank in the nation. There were 764 other bank holding companies competing in the same category, and this was the first time that an El Paso bank had taken the award. Selection criteria required that the bank be well run, follow sound banking principles, and provide safe and secure loans. (I might add from personal experience that they also provide excellent customer service.) And yet, they have decided that they will not be offering any more mortgage loans.

A lot of people in this country are returning to community banks after seeing the major banks feast on TARP money at tax payer expense. HuffPost Business has set up a web page called Move Your Money which encourages Americans to switch their accounts from the banking giants to the small community banks. The campaign has the support of leftist anti-corporate activists including Michael Moore. A May 6, 2011 article by Mary Bottari from the Center for Media and Democracy appearing on HuffPost Business recounts how the AFL-CIO is pulling its accounts from M&I Bank in protest of political donations that M&I made to Governor Scott Walker. Protests are planned in Ohio against JP Morgan Chase CEO Jamie Dimon when he travels to Columbus for the annual shareholders meeting. Dimon's primary crime in Ohio appears to be his own lavish bonuses and Chase's political support of Republican John Kasich.

The supreme irony of the Move Your Money campaign and all of the harping about the evils of banking giants is that the same leftist leadership that is encouraging Americans to abandon mega banks also stands in support of the Dodd Frank bill which will kill many of the community banks that the activists purport to love. According to a May 20, 2011, article in "Investor's Business Daily," by Paul Sperry, the American Banker's Association is predicting that the Dodd Frank Act and its enforcement agency, the Consumer Financial Protection Bureau, will drive more than 1000 banks out of business by the end of this decade. Elizabeth Warren, the de facto head of the agency which officially takes power July 21, 2011, has announced that "Change is coming. We will build a strong enforcement arm. More than half of our budget will be committed to establishing supervision and meaningful enforcement." Banks will have approximately 20 new reporting mandates under the Home Mortgage Disclosure Act, and they will also be required to collect and report data to the CFPB on applications for business credit made by minority-owned businesses. The data received by CFPB will be reviewed with an advisory board which will include inner-city activists who will look for evidence of discrimination.

ABA Chairman Steven Wilson states of the new regulations, that they are "bad news for community banks already collapsing under mountainous regulatory burdens." The costs of complying with the massive new regulations, examinations, fines and enforcement is simply so great that many small banks will be forced to close their doors. Since the community banks tend to lend money more aggressively than their larger counterparts, their demise will cut off additional sources of capital to small business owners.

In January, the Wall Street Journal ran a very interesting piece by Todd Zywicki, who is co-editor of the University of Chicago's Supreme Court Economic Review, entitled, "Dodd-Frank and the Return of the Loan Shark." Zywicki's piece details how the credit card rules enacted in the 2009 CARD (Card Accountability Responsibility and Disclosure) Act have restricted the availability of credit cards to many lower-income Americans and forced them to go to payday lenders, pawn shops and loan sharks since they can no longer access credit through more traditional means. Zywicki quotes the CFO of Advance America, a national pay day chain as saying, "We believe that we're starting to see a benefit of a general reduction in consumer credit, particularly subprime credit cards." Zywicki also quotes a letter from Chase CEO Jamie Dimon which went out to shareholders in the spring of 2010, "In the future, we will no longer be offering credit cards to approximately 15% of the customers to whom we currently offer them. This is mostly because we deem them too risky in light of new regulations restricting our ability to make adjustments over time as the client's risk profile changes."

And Zywicki says that as the Durbin Amendment takes effect, the situation will only worsen for low income Americans who will not qualify for free checking. "Financial products that cater to unbanked consumers--check cashers, pawn shops, purveyors of nonbank prepaid credit cards--can expect to benefit from the Durbin Amendment, just as payday lenders have prospered as a result of credit-card regulations."

All of this begs the question, what will happen to these people who are making a mass exodus to community banks if their banks are forced to close down because of regulations imposed by Dodd Frank and the CFPB? Remember that banks do not have to offer accounts to customers and credit history is a factor that is considered when opening a bank account. If the customer has suffered a job loss or had some major credit problems between moving their accounts from the banking giants to the smaller bank and the closure of their new bank, will they be able to simply turn around and reopen an account with a major bank? Will the major banks become more selective about whom they accept as depositors? Granted, Dodd Frank contains some legislation to force banks to accept currently non-banked consumers, but those efforts will be extremely targeted. That means that the next consumer exodus may utlimately be to the mattress store for a tried and true money storage system.

Monday, May 23, 2011

As the chairwoman of the local Hispanic Chamber of Commerce here in El Paso, I spend a lot of my time in meetings. Lately, those meetings seem to have mainly to do with growth, traffic, housing and the future of our community. Friday morning, for example, I spent several hours at a meeting to determine where we as a community expect to have our population growth. I was involved in a round table discussion with an engineer from Tx Dot (Texas Department of Transportation) a representative from the city of El Paso and a representative from Las Cruces, New Mexico and we looked at aerial maps and tried to make our best educated guesses about what directions our city can be expected to grow in over the next few years. El Paso currently has a population of slightly over 800,000 people, according to the 2010 Census, and we are land locked by the New Mexico state border on one side and the international border with the nation of Mexico on the other side. So we have to look at growth carefully as it pertains to traffic, to infrastructure, and to how we plan to provide services for those who are moving into our community.

What is always interesting to me at these meetings is that we hear a lot about various developers who have pockets of land that they are planning to develop into communities. But most of the people sitting at the table seem to assume that those communities of the future will be single family housing which will be purchased by the occupants. And they always seem surprised when I tell them that if the mortgage rules that are being created by Dodd Frank continue on as they are shaping up now, we can actually look for very little of our future housing to be single family residences. The "smart communities" of the future are going to be rental communities for the simple reason that the new rules keep too many people locked out of homeownership.

The clock is ticking on the public comment period for the FDIC's qualified residential mortgage proposal and still almost nobody outside of the industry seems aware that such a proposal even exists.The new proposed guidelines require a 20% down payment for a purchase, 25% equity for a refinance and 30% equity for a cash-out refinance. The borrower's debt to income ratio cannot exceed 28% for his housing ratio to his income and 36% for his total debts to his gross income. These ratios do not have compensating factors--allowing, for example, high cash reserves to be used to offset a higher ratio. As an additional blow, any borrower with a 60 day delinquency on his credit report will not qualify for a QRM.

Using these guidelines, only 20% of the loans sold to Fannie and Freddie over the last 10 years would have met the criteria of a QRM. The Federal Housing Finance Authority found that less than one-third of loans sold to Fannie and Freddie in 2009 would have met the QRM guidelines, and 2009 was one of the strictest underwriting years on record.

Any loan not meeting the QRM guidelines will be subject to 5% risk retention by the originator. That means that to originate at $200,000 loan, the originator would have to be able to retain $10,000 of that loan for the life the loan. (Risk retention guidelines implemented by Dodd Frank state clearly that the retained portion cannot be sold off separately.) Those dollar amounts will add up fast, so the risk retention guidelines will ultimately exclude a lot of smaller originators from originating anything except a QRM.

The comment period for the QRMs is up June 10, so with only a couple of weeks away, the National Association of Mortgage Brokers legislative chair Mike Anderson has produced a video to make people aware of the problems caused by QRMs. Click here to see the video. http://youtu.be/0KKgPsxS_RY You can also click Here to see a copy of the letter that Anderson has written to Congress regarding QRMs.

Of course, NAMB is not the only organization working on the proposed risk retention and "zero percent risk retention guidelines." The Mortgage Bankers Association has testified in front of Congress on this issue.

What does surprise me is the level of unawareness the general public has regarding these issues. When I tell community planners that at the end of the year when these guidelines go into effect, potential homeowners who want the best rate will have to put 20% down, have no more than a 36% debt to income ratio and be current within 30 days on their obligations, they are shocked. After all, a $200,000 home would require $40,000 down payment plus closing costs, putting it well out of the range of many young El Paso families. When I tell them that those who cannot qualify will go into a loan where the lender maintains 5% of the risk--which will probably be mainly one of the major banking entities--Wells Fargo, Chase or BofA--and that these loans are expected to cost 3 times as much as a "qualified residential mortgage" they are even more shocked. FHA has always been a popular product in our community, even though our community FHA loan limit is capped at around $275,000. But now that FHA has a mandate to reduce its lending presence to between 10 -15% of mortgage loans, most El Pasoans are going to be left out of homeownership permanently.

We are starting to hear more and more that "homeownership is no longer part of the American Dream." But it seems to me that most of the people spouting this mantra already have a home of their own or have achieved sufficient financial success that they certainly could purchase a home if they wanted to. But for young families trying to build a future, homeownership has always represented security and wealth creation. By setting guidelines up so high that homeownership cannot even be an option, we are depriving them of the benefits that homeownership offers.

If you want to weigh in on the QRM standards, you have until June 10 to do so. Get involved in this issue before the guidelines are mandated later this year.

Thursday, May 19, 2011

By now we all know that April 18 brought new increases to FHA's annual mortgage insurance premiums. MIP increased 25 basis points for virtually all "forward" mortgage products. (You have to love the new terminology we use today. We have "reverse" mortgages and then we use the term "forward" mortgages to indicate a regular mortgage product that requires a payment.)

What many of us did not know was that HUD made quite a few other changes in addition to just the premium increase. As we head into the summer home-buying season, it is important to know these changes before you start processing that residential loan.

First, HUD wants us know that "Case numbers should be requested and cancelled in accordance with prudent business practices and existing guidance." Specifically, originators should request case numbers only when the originator has an active loan application for the property and borrower, and originators need to remember to cancel their case numbers if the need arises.

Starting April 18, the FHA system will require originators to certify that they have a loan application for the borrower and the property.

The originator must also provide the borrower's name and social security number for all new construction projects including proposed construction and existing construction less than one year old.

Starting April 18, the FHA system will automatically cancel any uninsured case number that has not had activity in the last six months, unless an appraisal update has been entered, and/or the upfront MIP has been received.

Understanding this last point is very critical, particularly if you are dealing with a property case number that has been transferred from another borrower on your property. HUD considers the following items to be actionable to restart the 6 month clock:

case number assignment

completion of appraisal information

issuance of firm insurance commitment by FHA

receipt or update of insurance application

Notice of Return and Resubmissions

HUD does not consider updating borrower names and/or property addresses to be a last action item. Therefore, if you have entered changes to the borrower on a property but have not updated the appraisal or sent in the insurance application, your case number will still be cancelled at the end of six months. To avoid cancellation, you must complete one of the actionable items in bullet points above.

The automatic cancellation is for case numbers issued prior to April 18, 2011, before the MIP rate hike. So for example, if you have a case number issued December 15 with the old premium rates, and you have a new borrower for the property, you need to get your insurance application in prior to June 15 to avoid case number cancellation. A new case number will mean higher MIP premiums, which can cause a real problem if your Good Faith Estimate was prepared using the old numbers. A new case number will also have to underwritten to current FHA standards. Any case number issued prior to April 18, 2011, that was not insured prior to April 18, 2011, has been automatically cancelled.

If a case number has been cancelled, it will not be reinstated unless the originator "provides evidence that the subject loan closed prior to the cancellation of the case number, such as a HUD 1 Settlement Statement, or ...provides evidence that not reinstating the case number causes an undue hardship to the borrower that is unrelated to the recent changes in premiums and underwriting requirements." (Good luck doing that by the way. Since the hardship cannot be due to the fact that the loan will be more expensive or more difficult to obtain, you may be hard pressed to find an excuse that HUD will actually accept.)

The clock is ticking on these case numbers issued prior to April 18. For a list of case numbers that will be automatically cancelled next month, visit FHA Connection/Single family on HUD's website, http://www.hud.gov/. You can also find a copy of the mortgagee letter 11-10 which deals with the specific facts on case number cancellation and usage.

FDIC chairwoman Sheila Bair is leaving the agency. She is stepping on down July 8, although her term officially ends June 30. We are told that she is staying the extra week to work on the final parts of the agency's "living will" proposal for corporations with over $50 billion in assets. So in honor of her resignation, I am taking today to highlight a few of Ms. Bair's accomplishments.

1. Changes to the way that the FDIC collects fees for the federal deposit insurance. Bair pushed the banks to pay a larger share of the insurance fees. Previously, banks had been assessed fees based on the deposits they held. Now banks pay fees based on the loans they keep in their portfolio. Since big banks tend to hold more loans relative to deposits, this increased fees. (However, it might also explain why smaller banks hesitate to make loans now.)

2. The Qualified Residential Mortgage. This massive change to mortgage lending will codify strict underwriting standards for mortgages into law. According to testimony last month from the Mortgage Banker's Association, fewer than 20% of the loans sold to Fannie Mae and Freddie Mac over the past decade would have qualified using the FDIC's QRM guidelines. Bair assures us that we should not worry, because QRMs are only designed to be a very small piece of the mortgage market. People not qualifying under QRM guidelines will have to seek a higher cost mortgage(some experts estimate 3 times higher) in which the bank retains 5% of the loan in their portfolio.

3. Living Wills for financial firms with more than $50 billion in assets. Any firm with more than $50 billion in assets is now considered significant to the financial health of the nation under the Dodd Frank bill, and so these companies must have a plan in place for their own dissolution. The "Living Will" must include information about how the depository institution is sufficiently protected from risks arising from activities of non bank subsidiaries of the company, complete disclosure of the ownership structure, and assets, liabilities and contractual obligations of the company. The plan also needs to identify how regulators will determine where major collateral of the company is pledged. The Federal Reserve and the FDIC may require more disclosure as needed.

Quarterly, companies meeting the "Living Will" standards will submit a credit exposure report to outline all of their credit exposures. U.S. companies will have to provide information on all domestic and foreign-owned companies.

This is a lot of information for financially healthy private firms to have to disclose to the federal government about their daily operations. The Pew Financial Reform Project just completed a report stating that these new "Living Wills" are "crucial" to ending the concept of "too big to fail." The Report also found that the agencies need to set up clear "triggers" for what would signal the need to wind down a failing firm.

To me, the whole concept of private institutions being forced to file "living wills" with the government so that the Feds can dissolve a private institution is a little like asking someone to dig their own grave. Even assuming that these steps can be used to prevent another bailout, who is to say that they cannot also be abused? When companies are required to file detailed information about their ownership, affiliations, credit lines, etc., how can we guarantee that an overzealous, powerful bureaucrat will never use that information for personal profit? How can we be sure that companies will not be dissolved as part of political payback, or to give the assets to a political ally? Giving that much power over the future of a private business to regulators is an extremely dangerous move.

Ms. Bair believes so strongly in financial reform and in "living wills" that she will be presiding over the board meeting in July where some final policy proposals on this issue are on the agenda. After July 8, Ms. Bair will be gone from the FDIC, but her policy proposals and their consequences will be with us for a long time to come.

A little more than 60 days from actually taking power as one of the most powerful government agencies ever created, the Consumer Financial Protection Bureau is busy completing one of its very first tasks--the creation of a new mortgage disclosure which will replace the existing good faith estimate and the existing truth in lending.

Regular readers of this blog know that I have been extremely critical of the CFPB in general and of the recent federal gymnastics by various agencies in an attempt to come up with a disclosure form that works. I was the President of the El Paso Association of Mortgage Brokers in 2002 which HUD first introduced RESPA reform and the forerunner of the good faith estimate we are using today. I was part of the letter writing campaign to Congress that stopped those initial attempts in 2004. But, in spite of our efforts, in 2010, HUD did implement the new Good Faith Estimate. In my opinion, the 2010 GFE is one of the most useless documents ever created. It combines fees and costs so that borrowers cannot truly see what they are paying to the loan originator versus the lender. This makes it virtually impossible to negotiate fees. (However, as of April 1, the most recent Federal Reserve rules have ended negotiations between brokers and consumers on lender-paid loans anyway, so this is really not an issue anymore.) My other major criticism of the 2010 good faith estimate is that it does not answer the three most important questions that consumers really do want to know:

How much is my total payment?

How much is my down payment?

How much money do I need to close?

In order to correct some of the issues, the Federal Reserve revised the truth in lending forms in January. The new truth in lending form does contain the total payment to include taxes and insurance, but it still does not answer the other two questions.

Because of all of the regulatory nonsense that we have suffered through the past three years, I was extremely skeptical at the idea of still another form. But I must admit that I was pleasantly surprised to see the sample forms that the CFPB is considering. I am attaching the link here so that you can look at them for yourselves. http://www.consumerfinance.gov/knowbeforeyouowe/about/

There are two sample forms; CFPB is accepting comments on them until May 27. They are seeking input from both consumers and the lending community to include brokers and bankers.

So what do I like about the forms? For starters, they are written plain English in large type that should be understandable to everyone. The form contains the full amount of downpayment, the total dollar amount of closing costs, and the total amount that the borrower should expect to bring to closing with an additional note that any credits (for earnest money or fees paid outside of closing) will be credited toward that amount.

The form also lists clearly the principal and interest payments and the total estimated payment with taxes and insurance. It details whether the loan is an adjustable rate or a fixed rate mortgage, and the maximum amount that the rate can increase to (lifetime cap) as well as the maximum amount that the house payment could increase to. On the second page is a breakdown of all costs. These are still bundled, a la the 2010 Good Faith Estimate. In fact, the second page looks very much like page 2 of the 2010 Good Faith Estimate, so there is still a box for the owner's title insurance and a place where we will have to disclose the home warranties and pest inspections. However, for borrowers this should provide a good, solid breakdown of what they can expect to spend on the transactions.

One comment that I would have about the new forms is that they list the origination fees at the top of page 2 in one box. There is no box for lender credits or for adjusted origination fees immediately following the top box as we have today on our forms. At the bottom of the form, there is a box for seller or lender credits. In a lender-paid transaction where the originator is being paid by the lender, this could be very confusing to the borrower, since the lender credit would not appear until the bottom of the form. In a comparison shopping scenario, that could cause the loan originated by an independent originator to appear much more expensive than its bank-originated counterpart.

The origination fee still cannot change and the other fees appear to be subject to a 10% tolerance as they are now. The new form does say clearly in large type that the estimate is only good through a certain date and that after that date it is subject to change.

The two model disclosures are just a first step. After the CFPB gets input from everyone they are supposed to hold round table discussions in LA, Albuquerque, Springfield MA, Baltimore, Chicago, and Birmingham.

Both NAMB and NAIHP have been allowed to weigh in on the new forms, so that is an encouraging sign for our industry. Log on to the link and give the CFPB some input. At least this time, we are all going to have some say in our future.

Wednesday, May 18, 2011

(This post is the all-time most popular post I have ever written. It is directed at those who are looking at walking away from a house they can make payments on simply because of dropping equity. On February 10, 2014 I wrote a follow-up post with some information that may help you if you are facing foreclosure because of job loss, reduction in hours, or inability to make payments because of insufficient income. That post can be accessed here.)

On Sunday our pastor decided to preach about the dismal state of the economy and how we should react to it. During the sermon, he mentioned that his brother's house is worth fifty percent of what it was purchased for and that his brother has no choice but to walk away from his home. Now, our pastor's brother is self-employed, and I don't know his specific set of circumstances; if he can no longer make the house payments on his house due to loss of income he may, in fact, have no choice but to walk away from a home he can't sell. But more and more, we are hearing that if our houses have lost value we should just "walk away" from what has turned out to be a bad investment.

One vocal proponent of "walking away" is financial guru Suze Orman who has been quoted in numerous articles stating that those who are "underwater" in their mortgages should walk off and let the houses get foreclosed on. This past Monday, Ms. Orman appeared on "The View" with what has become her new rallying cry, "If you are upside down in your mortgage and the bank will not work with you, walk away from the house."

In Orman's book The Money Class, she advises borrowers, "Do the calculations everybody. How much is it costing you to actually stay in that house? How many years will it take for you to pay more for that house than it is worth? If it's 3 years, 4 years, 5 years, are you kidding me? That's a house you really need to say bye bye. It's not worth the money." Orman advises people who are upside down in their home mortgages to try to get the bank to modify the loan. Failing that, she says that homeowners should seek out a short sale or a deed in lieu of foreclosure. "If they won't do that, then walk away. It's just how it is."

The fact that a respected money expert is telling American borrowers that they can and should default on their loan obligations when they have the ability to repay is really a sign of just how far we have fallen as a nation. It is deplorable to think that we have come to a place as a society where defaulting on our obligations is considered some kind of a moral high road.

CBS Sacramento carried a story on April 28, 2011 of borrowers who did just as Orman suggests and let their homes go into foreclosure because they no longer have the equity they once did. Mary Beth and Bob Stucky were underwater $200,000 and the bank refused to reduce the principal, so they walked away and became renters. They are now renting a larger house for a smaller payment, and although they may not be able to buy a home again for many years, they say they feel "peaceful" because they realize that their home was a "bad investment." CBS Sacramento also interviewed Rob Sorenson who walked away from his home and allowed it to go into foreclosure. All of his credit had previously been good, but his decision to allow his home to be foreclosed on resulted in his having all of his credit cards cancelled so that when his dog got sick and had to go to the vet he had actually had to borrow $2000.00 from a family member since he does not have any access to credit. So he has not only defaulted on a major obligation, but he has actually become a burden to family members who are having to loan him money that he used to be able to borrow on his own.

Other than the nuisance factor, what is really wrong with walking away from a home that is underwater? Plenty. For one thing, it doesn't make any sense. If you have a fixed rate, fully amortized mortgage for thirty years, or fifteen years, or twenty years, you know at the time that you sign the mortgage documents how much your monthly payment will be and also how much you will be paying for that home. The truth in lending document included in every mortgage package contains the exact dollar amount you can expect to pay for that loan over the life of your mortgage, and it is normally two to three times higher than the amount you borrowed due to interest and finance charges. So in that sense, every mortgage holder is upside down on his or her mortgage when they sign the papers. But if you have not suffered a job loss, a health crisis, or a financial tragedy, you have no reason not to make those payments. Why? Because the appreciation or depreciation on the house is just a number that changes arbitrarily. When properties were appreciating at a skyrocketing pace, no homeowner ever went back to their mortgage company and said, "I know I bought this house for $200,000 and I financed $150,000 but now it is worth $500,000.00 so I think I owe you some additional money." So why, in the reverse situation, should the bank lower your principal simply because the value has dropped? You didn't owe them more when the values were rising, and you don't owe them less now.

If we had no moral obligation to pay for things that depreciated, no one would ever make a car payment again. Virtually everyone understands that the moment they drive their car off the lot, it has less value than it did twenty minutes before when it was sitting on the lot. If we applied the same logic to all items as we do to homes, we could not have any credit system at all since the moment that something became old or worn we would no longer need to make the payments. The problem with housing is that we no longer look at our homes as a place to live. We have decided as a society that our houses are supposed to contain enough equity to pay for our summer vacations and to give us a credit card to spend on whatever we wish during the year. If the house can no longer be a source of free fun money, it has failed us and we should not have to pay for it.

Second, the boom was artificial, and so is the bust. When real estate values were booming, we all seemed to forget the basic principles of gravity "What goes up must come down." Right now we are in a double dip, and values are dropping this summer and will continue to drop for a while as underwriting guidelines continue to tighten. But, after that, we can look for values to rise again as properties become more expensive. That house that today is worth $200,000 less than it was 4 years ago may have regained its losses in 5 to 10 years. In any event, when you walk away from a home you are making the payments on, you are throwing away all of the money you have already put into that home, which is ridiculous.

Third, although some people are forced into foreclosure by financial circumstances, many have other options. Most borrowers who are practicing strategic defaults have high credit scores and have not suffered a job loss. They simply do not see the value in making their payments. If you want to move into a cheaper house fine--how about renting your current home to someone else? As more and more people are forced to become renters, the demand for rental housing is going to grow. For a little effort, you can save your property and your credit.

Fourth, odds are very good that the house you are walking away from today may well be your last. As underwriting guidelines continue to tighten, many homeowners who have abandoned their homes for no reason are going to be shut out of homeownership in the future, either by much higher interest rates and financing costs, or by credit guidelines that do not give them a second chance. And Orman actually knows this. She says that the new American dream may not include ever owning a home again. "And if you do rent for the rest of your life, it's not a big deal. Who cares? Just invest that money you would've put in your home somewhere else....The new American dream really is a dream that allows you to sleep at night where you feel secure, and you know what is yours cannot be taken away again, because of the actions of others."

That's just nonsense. Orman acts as if strategic defaulters go off to a happy paradise with no more problems. Renters make the payments on properties that other people own and put wealth in the pockets of property owners--period. And while "what is yours cannot be taken away again" what is not yours certainly can be. Your landlord can lose the house you are renting to foreclosure if he does not make the payments regardless of whether you are making your payments to him or not. Or you can find yourself in the same situation as a woman who recently called me to tell me that her landlord is not renewing her lease because the landlord has decided to give her house to her own son and evict the tenant. Life does not come with guarantees, whether you rent or own.

Finally, homeownership provides security for people in their senior years. While young couples in their thirties and forties may not feel the pinch of renting, older Americans have typically relied on having their homes paid off as part of their retirement. A home that is paid off is good security towards any financial crisis, and many communities now protect seniors against out of control property taxes. Reverse mortgages provide seniors with the option of using the equity in their homes to offset living costs or to get rid of a mortgage payment that is too high. A home that is owned free and clear provides a senior with many options that a renter simply will never experience.

Orman is pushing all of those unhappy homeowners out there to hurry up and default sooner rather than later since the federal tax break for foreclosures and short sales will expire at the end of 2012. That would mean that if you default on $100,000 debt in 2013, you owe federal income taxes on $100,000. So in addition to ruining your credit and your future homeownership chances, you will owe a massive tax penalty to the IRS.

If you have lost your job, experienced a divorce resulting in loss of income, or gone through some other life changing experience beyond your control that has cost you your home, don't beat yourself up. Life happens. But if you are considering strategic default because your home is not worth what it used to be, don't be fooled by this concept that you are going to be better off "letting the house go." In the end, you will be better off if you act responsibly and meet your obligations--either by continuing to make the payments or finding a tenant who can make them for you. A few years down the road, when values have recovered and houses are very difficult to purchase, you will be glad you held on to your property.

Monday, May 16, 2011

With flooding along the Mississippi River a national headline this week, the House of Representatives is revisiting the National Flood Insurance Program. As you may recall, last year funding for the NFIP lapsed several times, making it impossible to sell or refinance houses located in a flood zone. Maxine Waters had a bill in the House of Representatives last year to extend the National Flood Insurance Program for five years, but even though her bill passed the House, it did not pass the Senate. The Senate merely extended the current program until September 30, 2011.

On Friday, May 13, 2011, HR 1309, the National Flood Insurance Reform Act of 2011, unanimously passed the House Financial Services Committee and will now head to the floor for a vote. Introduced by Judy Biggert, (R-IL), this bill will extend the National Flood Insurance program for five years, until 2016. But, unlike some of the past bills that have attempted to extend the flood insurance program, HR 1309 addresses some of the biggest problems of the NFIP.

Undoubtedly, the biggest single problem with the NFIP is that it is currently $18 billion in debt to the U.S. Treasury with no hope of being able to pay back the money it has borrowed. Unlike other insurance programs that are required to retain a reserve against emergencies, the NFIP uses the U.S. Treasury as its reserve. The program lost billions paying for the damage caused by Hurricane Katrina and the other hurricanes of 2005, and it has not been able to recoup those losses. Now, with flooding along the Mississippi River, the program will be paying out billions more in flood insurance.

Part of the problem with the NFIP is that the program is mainly utilized by people living in areas that flood. For example,the Florida Disaster website, which is managed by the Florida Division of Emergency Management, states that the state of Florida has 18.5 million residents and 80% of them live or do business on or near the coastline. Ninety-seven percent of Florida communities participate in the National Flood Insurance Program, and as of December 31, 2010, there are over 2 million flood insurance policies in Florida, representing 37% of nationwide policies and totalling 1.2 billion dollars in insurance coverage. (Source http://www.floridadisaster.org/)

Traditional insurance spreads risk by getting a large number of people into a pool, including those who, hopefully will never have need of the particular coverage being offered. And that is certainly what FEMA has been attempting to do with its ad campaign to get all homeowners to purchase flood insurance voluntarily. The "Hillsboro Reporter" quotes the Region 6 FEMA administrator Tony Russell, "While many people are required by mortgage and lending companies to have flood insurance, FEMA and the National Flood Insurance Program (NFIP) strongly recommend that everyone have flood insurance...The reason is simple, 'You don't have to be in mapped flood plain to flood.'" Other representatives of FEMA have been quoted as saying, "We all live in a flood plain."

FEMA has also redrawn the flood maps to put more residents into flood plains, including those who have only a very slight chance of flooding. By requiring that those people with less risk of actually flooding paying into the system, they can shore up revenues.

Unfortunately for FEMA, and fortunately for the rest of us, we don't all live in a flood plain. My office building sits high on the street. When rains came that flooded most of El Paso in 2006, I got a small amount of water under the garage door, and that was it. And for many people in Texas and in New Mexico, there is no real chance of ever flooding, so we would be paying for flood insurance that we would never use. Just to get an idea of what flood insurance would cost, I put my office address into the floodsmart.gov website and pulled up a quote. The area is listed as "moderate to low risk,". For a policy with a $1000 building deductible, and coverage that would cover the note completely, the premium would be $1447.00 per year. The Flood Smart quote states clearly that the insurance will not pay replacement cost, and that the claims will be settled using the depreciated actual cash value of the building. Also, business interruption insurance is not available through the program. That sounds like very little coverage for $1447 a year.

Southern New Mexico Congressman Steve Pearce, (R-NM) who actually represents the district where I live, has added an amendment to HR 1309 to remove federal mandates for those who actually should not be in flood zones. "During this difficult economic time, New Mexicans cannot afford to pay for federally mandated flood insurance that they don't need." On his website, Pearce tells the story of a constituent in Tularosa "whose home is seventy feet above the river. Her home is listed in the flood plain, but the river itself is not." (Tularosa is in the southern New Mexico desert, where flooding is extremely unlikely.)

To address some of these issues, HR 1309 creates a "Technical Mapping Advisory Council" consisting of the administrator of FEMA or his designee, the Director of the U.S. Geological Survey Department of the Interior, the Under Secretary of Commerce for Oceans and Atmosphere, the Commanding Officer of the U.S. Army Corps of Engineers, the chief of the Natural Resources of Conservation Service of the Department of Agriculture, the Director of the U.S. Fish and Wildlife Service of the Department of the Interior, and the Assistant Administrator for Fisheries of the National Oceanic and Atmospheric Administration of the Department of Commerce, or the designees of each of these individuals. Additionally, the Administrator of FEMA shall appoint 9 members who will be experts representing each of the following areas of specialization, 1. data management, 2. real estate, 3. insurance, 4. regional flood and storm water management organization; 5. a State emergency management agency or association; 6. a professional surveying association; 7. a mapping association; 8. an engineering association; 9. an association representing flood hazard determination firms. The members are to be appointed based on knowledge and competence in the areas of surveying, cartography, remote sensing, and technical aspects of flood insurance rate map preparation.

This Council will be charged with the responsibility of proposing new mapping standards to "ensure that flood insurance rate maps reflect true risk, including graduated risk that better reflects risk to each property; such reflection of risk should be at the smallest geographic level possible...to ensure that communities are mapped in a manner that takes into consideration different risk levels in the community." By having a professional council set new standards for the maps, Congress is hoping to correct some of the problems that have been created by placing a lot more homes in flood zones over the past few years.

Finally, HR 1309 mandates that FEMA and the Government Accountability Office assess options for the privatization of the flood insurance program. Privatization could take the stress off of taxpayers, who currently owe $160.00 per U.S. household to cover the $18 billion dollars owed by the NFIP to the U.S. Treasury--about six times more than the NFIP currently collects in premiums. Craig Fulgate, director of FEMA, testified before Congress in April that "FEMA is unlikely to pay off its full debt, especially if it faces catastrophic loss years."

HR 1309 has bipartisan support so sponsors are hoping to get it to the president's desk before September 30 when the current funding for NFIP expires.

Friday, May 13, 2011

By now we all know that April 18 brought new increases to FHA's annual mortgage insurance premiums. MIP increased 25 basis points for virtually all "forward" mortgage products. (You have to love the new terminology we use today. We have "reverse" mortgages and then we use the term "forward" mortgages to indicate a regular mortgage product that requires a payment.)

What many of us did not know was that HUD made quite a few other changes in addition to just the premium increase. As we head into the summer home-buying season, it is important to know these changes before you start processing that residential loan.

First, HUD wants us know that "Case numbers should be requested and cancelled in accordance with prudent business practices and existing guidance." Specifically, originators should request case numbers only when the originator has an active loan application for the property and borrower, and originators need to remember to cancel their case numbers if the need arises.

Starting April 18, the FHA system will require originators to certify that they have a loan application for the borrower and the property.

The originator must also provide the borrower's name and social security number for all new construction projects including proposed construction and existing construction less than one year old.

Starting April 18, the FHA system will automatically cancel any uninsured case number that has not had activity in the last six months, unless an appraisal update has been entered, and/or the upfront MIP has been received.

Understanding this last point is very critical, particularly if you are dealing with a property case number that has been transferred from another borrower on your property. HUD considers the following items to be actionable to restart the 6 month clock:

case number assignment

completion of appraisal information

issuance of firm insurance commitment by FHA

receipt or update of insurance application

Notice of Return and Resubmissions

HUD does not consider updating borrower names and/or property addresses to be a last action item. Therefore, if you have entered changes to the borrower on a property but have not updated the appraisal or sent in the insurance application, your case number will still be cancelled at the end of six months. To avoid cancellation, you must complete one of the actionable items in bullet points above.

The automatic cancellation is for case numbers issued prior to April 18, 2011, before the MIP rate hike. So for example, if you have a case number issued December 15 with the old premium rates, and you have a new borrower for the property, you need to get your insurance application in prior to June 15 to avoid case number cancellation. A new case number will mean higher MIP premiums, which can cause a real problem if your Good Faith Estimate was prepared using the old numbers. A new case number will also have to underwritten to current FHA standards. All ininsured case numbers issued prior to April 18, 2011 have been automatically cancelled.

If a case number has been cancelled, it will not be reinstated unless the originator "provides evidence that the subject loan closed prior to the cancellation of the case number, such as a HUD 1 Settlement Statement, or ...provides evidence that not reinstating the case number causes an undue hardship to the borrower that is unrelated to the recent changes in premiums and underwriting requirements." (Good luck doing that by the way. Since the hardship cannot be due to the fact that the loan will be more expensive or more difficult to obtain, you may be hard pressed to find an excuse that HUD will actually accept.)

The clock is ticking on these case numbers issued prior to April 18. For a list of case numbers that will be automatically cancelled next month, visit FHA Connection/Single family on HUD's website, http://www.hud.gov/. You can also find a copy of the mortgagee letter 11-10 which deals with the specific facts on case number cancellation and usage.

FDIC chairwoman Sheila Bair is leaving the agency. She is stepping on down July 8, although her term officially ends June 30. We are told that she is staying the extra week to work on the final parts of the agency's "living will" proposal for corporations with over $50 billion in assets. So in honor of her resignation, I am taking today to highlight a few of Ms. Bair's accomplishments.

1. Changes to the way that the FDIC collects fees for the federal deposit insurance. Bair pushed the banks to pay a larger share of the insurance fees. Previously, banks had been assessed fees based on the deposits they held. Now banks pay fees based on the loans they keep in their portfolio. Since big banks tend to hold more loans relative to deposits, this increased fees. (However, it might also explain why smaller banks hesitate to make loans now.)

2. The Qualified Residential Mortgage. This massive change to mortgage lending will codify strict underwriting standards for mortgages into law. According to testimony last month from the Mortgage Banker's Association, fewer than 20% of the loans sold to Fannie Mae and Freddie Mac over the past decade would have qualified using the FDIC's QRM guidelines. Bair assures us that we should not worry, because QRMs are only designed to be a very small piece of the mortgage market. People not qualifying under QRM guidelines will have to seek a higher cost mortgage(some experts estimate 3 times higher) in which the bank retains 5% of the loan in their portfolio.

3. Living Wills for financial firms with more than $50 billion in assets. Any firm with more than $50 billion in assets is now considered significant to the financial health of the nation under the Dodd Frank bill, and so these companies must have a plan in place for their own dissolution. The "Living Will" must include information about how the depository institution is sufficiently protected from risks arising from activities of non bank subsidiaries of the company, complete disclosure of the ownership structure, and assets, liabilities and contractual obligations of the company. The plan also needs to identify how regulators will determine where major collateral of the company is pledged. The Federal Reserve and the FDIC may require more disclosure as needed.

Quarterly, companies meeting the "Living Will" standards will submit a credit exposure report to outline all of their credit exposures. U.S. companies will have to provide information on all domestic and foreign-owned companies.

This is a lot of information for financially healthy private firms to have to disclose to the federal government about their daily operations. The Pew Financial Reform Project just completed a report stating that these new "Living Wills" are "crucial" to ending the concept of "too big to fail." The Report also found that the agencies need to set up clear "triggers" for what would signal the need to wind down a failing firm.

To me. the whole concept of private institutions being forced to file "living wills" with the government so that the Feds can dissolve a private institution is a little like asking someone to dig their own grave. Even assuming that these steps can be used to prevent another bailout, who is to say that they cannot also be abused? When companies are required to file detailed information about their ownership, affiliations, credit lines, etc., how can we guarantee that an overzealous, powerful bureaucrat will never use that information for personal profit? How can we be sure that companies will not be dissolved as part of political payback, or to give the assets to a political ally? Giving that much power over the future of a private business is an extremely dangerous move.

Ms. Bair believes so strongly in financial reform and in "living wills" that she will be presiding over the board meeting in July where some final policy proposals on this issue are on the agenda. After July 8, Ms. Bair will be gone from the FDIC, but her policy proposals and their consequences will be with us for a long time to come.

Monday, May 9, 2011

Ranking Member of the House Financial Services committee, Barney Frank appeared on CNBC last Wednesday to explain the rationale behind his newest piece of proposed legislation--a bill which would remove the 4 rotating members of the regional Federal Reserve Banks from the 12 member Federal Open Markets Committee. The President of the New York Federal Reserve is a permanent member so apparently he would get to stay. Frank wants these regional rotating members stripped of their voting rights and replaced because "they are chosen by the private banks without input or oversight from any governing body."

"I think it's fine for them [the representatives of private banks] to sit in, but setting interest rates...that's a public function. The Federal regional presidents are picked by private citizens. It really is totally inconsistent with any kind of theory of democracy," says Frank in his interview. When questioned about the wisdom of not allowing the banking entities that have to work within the framework of the interest rates, to have a place at the table, Frank responded that they can have input but they should not be able to vote on an issue that they can potentially profit from.

I have posted the link here to the interview. It is really worth watching.

So what would Frank consider to be more in keeping with the principals of democracy? "I would have the people appointed by the president and confirmed by the Senate be voting members. I just think it's totally inconsistent with any theory of democracy to have purely private citizens sending people to vote on interest rates." However, appointees of the president represent the people who need to get mortgages and consumer loans, so this is completely in keeping with democracy, according to Frank.

Frank's steadfast determination to see the directors of financial policy appointed by the president and confirmed by the Senate is interesting given the fact that last year, when interim director of the Consumer Financial Protection Bureau Elizabeth Warren faced a tough uphill battle for confirmation in the Senate, Frank stated in an interview with the Huffington Post that if Ms. Warren could not get Senate confirmation, the president should just appoint her using a recess appointment while the Senate was away on vacation. "Given the way [the Senate has] misused the filibuster...given it's anti-Democratic, I think the President did exactly the right thing with Donald Berwick," said Frank in his interview. (Donald Berwick received a recess appointment to head the Centers for Medicare and Medicaid Services.)

Warren was named interim director of the CFPB last year, but the Mortgage Bankers Association is speculating that this year the White House will use a recess appointment to give Warren the top job as the head of one of the nation's most powerful new agencies.

Following that logic, if the President has appointees for the Federal Reserve board who are unlikely to pass confirmation, he can just appoint them as recess appointments when the Senate is on vacation. That's not undemocratic at all.

Listening to Frank just makes me wonder what political science courses he took in school and how his teachers explained the concept of democracy to him in the first place.

Friday, May 6, 2011

Yesterday I completed my mortgage call report and submitted it through the NMLS system. Since this was my first time to complete this particular report, before doing so I decided to take advantage of a training webinar offered by the NMLS system to make sure that I had each field completed properly and that I understood proper submission procedures. I had registered in advance for the $35.00 training session, and I will say that it was well worth the money because even though the standard form is very easy to complete and basically self-explanatory, the NMLS system is a little quirky and contains some submission glitches I might not have understood without the benefit of the training. There is still one training session available on May 15 for anyone who would like to participate. Information about registration is available on the NMLS website.

As part of the SAFE Act signed into law in 2008, all mortgage brokers and loan originators working for brokers (we are now all classified as originators) were required to obtain a national license in order to keep our jobs. The system was implemented last year, so last year all of us went through a state licensure test, a federal licensure test, a federal criminal background check and a credit check. We also all had to complete 20 hours of prelicensure continuing education prior to applying for our federal licensure.

Last August as I took my federal test early in the morning, I really thought about how completely ridiculous this whole experiment was. In the space of a couple of days I took a state test and a federal test in order to be able to continue doing a job that I had been doing for twelve and a half years. Fortunately, my credit was still good in spite of the difficult times, because if it had not been, poor payment history would have been grounds for denial of my license. Even though last year was a bad year and money was tight, we found the funds to pay for the continuing ed fees, testing fees, credit check fees and licensure fees.

Employees of depository institutions did not have to be licensed--just registered. And they actually do not have to complete the registration process until July. This too is ironic. In February I attended an early morning networking event for an association I belong to, and during the course of the event, a branch manager for a major bank stood and introduced her newest loan originators. One of them was a former borrower of mine who used to work for a small loan company. This person had always earned an okay living, but his credit was horrible. And since he had not experienced major life disruptions such as illness or job loss, his credit was horrible simply because he had a long history of not paying his bills. Once again, I thought about the difference between the standards applied to small business owners and the standards applied to employees of major banking centers. This individual would never pass the stringent standards applied to mortgage brokers, and yet he is working for a major bank so compliance is not even an issue.

Yesterday, while sitting through the training webinar, I was once again confronted with another example of the incredible discrimination against small business owners that has come to characterize the mortgage lending industry. Part of the Safe Act requires that licensees submit an unaudited financial statement for review by the regulators. The financial statement is due 90 days after the company's fiscal year end. The stated purpose of requiring the financial statement is so that regulators can perform "risk assessment" on the companies they regulate.

To put this requirement in perspective, the trainers said that they expect that 90% of their licensees will be completing the "standard" disclosure form which is for smaller companies that do not sell directly to Fannie Mae or Freddie Mac. Companies are further differentiated by those with warehouse lines--correspondents-- and those without--brokers. So the regulators know that many of the companies they have licensed are extremely small. We all passed FBI background checks and credit checks to get our licenses. We all had to pass state and federal tests. We have to have yearly continuing education. And yet, the regulators need to see our financial statements to perform "risk assessments".

Mortgage brokers and correspondents are not depository institutions. Our income is fully disclosed, capped under the new Dodd Frank bill, and limited to either commissions paid by our borrowers or commissions paid by our lenders. The Good Faith Estimates which we issue are now binding contracts; we cannot reissue them with changed origination fees even if the circumstances that would call for our fees to change is completely beyond our control. The only risk we pose is to ourselves in the form of personal bankruptcy.

Part of the new Call Report requires that we disclose not only the number of loans we originated and the dollar amount of the loans we originated, but also the exact amount of the commissions we made on the loans for each quarter. I suppose that these figures are compared with the financial statement at the end of the year. And if they decide that we are floundering too much financially, I suppose that the regulators can step in and close us down.

Our industry has always held the view that richer companies were better than poorer ones. HUD exemplified this attitude for many years by requiring that brokers who sold directly to FHA have cash reserves higher than what could easily be afforded by the majority of brokers. But experience teaches that the wealthy are not necessarily more honest than anyone else. Remember Bernie Madoff? And why does a regulator have the right to decide that a company that has not broken any laws, is filing its reports on time, and has no complaints filed against it does not deserve to remain open because it is not profitable? Only in the strange new world of Dodd Frank does a regulator's opinion of the future of a small business trump that of the owner who is sacrificing to keep it open. I disagree thoroughly with the Dodd Frank bill's provisions to close down floundering companies that might pose a systemic risk to the financial system, but the idea of shutting down businesses that mainly pose a threat to themselves is ludicrous.

I don't want to sound paranoid, but the whole experience gives me the distinct feeling that Big Brother is watching.

Wednesday, May 4, 2011

According to Bloomberg, Minnesota based TCF National Bank has filed an appeal with the U.S. 8th Circuit Court of Appeals asking the court to declare the Durbin Amendment unconstitutional.

TCF's suit is the latest in a series of attacks on the Dodd Frank bill's attempt to cap debit card fees. The Durbin Amendment has powerful enemies (Jamie Dimon, CEO of JP Morgan Chase has referred to the Durbin Amendment as price fixing.) Both the House and the Senate have versions of bills to delay implementation of the Durbin Amendment and reportedly Barney Frank had agreed to support HR 1081 which would delay implementation of the Durbin Amendment for two years pending more studies of its consequences.

The issue here will sound very familiar to those of us who have just suffered through the loan originator compensation rules. The Federal Reserve Rule on debit card interchange fees will cap the interchange fee per debit card transaction at 12 cents, regardless of the size of the transaction. As a result, small banks are likely to limit the size of debit card transactions or cut off access to free checking.

TCF had filed a suit against Fed Chair Ben Bernanke in an attempt to stop implementation of the bill, but on April 4, U.S. District Judge Lawrence Piersol ruled against TCF and denied the bank's motion to delay implementation of the rule. At the same time, Piersol also denied the government's motion to dismiss the suit completely.

On Monday, May 2, TCF was back in court appealing Piersol's decision. The TCF attorneys argued in their brief, "We are talking about the establishment of a confiscatory rate regime fully 15 years after banks began their debit businesses." TCF is asking the court to rule the Durbin Amendment unconstitutional.

If TCF were to prevail in this case, the precedent would be amazing. Banks are upset about the Durbin amendment because it caps the fees that they as private businesses can charge for debit cards. If that is found to be unconstitutional, couldn't the same legal logic be applied to the Merkley amendment which caps loan origination fees at 3%? If the government does not have the constitutional right to dictate what a private business can charge for its services, couldn't this impact also on the loan origination compensation rules forced on all of us by the Federal Reserve last month? Maybe the FDIC does not have a constitutional right to set up underwriting standards, or to dictate what types of mortgage products individual businesses can access and sell.

Most importantly, if one part of the massive Dodd Frank bill is ruled unconstitutional, the ripple effect might actually bring down the entire bill. Although there are both House and Senate bills to repeal Dodd Frank, a ruling from a court striking down at least parts of the bill would impact greatly on the future of the law as a whole.

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Frontier 2000 Media Group

About Me

In 1986, Alexandra Swann graduated at fifteen years of age with a bachelor’s degree in liberal arts from Brigham Young University and a GPA of 3.85. The following year, when she was sixteen, she received a Master’s Degree in History from California State University. After graduation, she taught history and English as a second language for four years at El Paso Community College. In 1989, her book, No Regrets: How Homeschooling Earned Me a Master's Degree at Age Sixteen, was published, in which she details her experiences with homeschooling. In 1993, the Swann Family was featured in the CBS Television Series, “How’d They Do That?”They were the subject of articles in The National Enquirer and Woman’s World, and were featured on Paul Harvey’s radio broadcast.

For fifteen years, from 1998- 2013, Alexandra was self-employed in the financial services industry in El Paso, Texas. As a small business owner who was active in the community and on various civic boards, she learned first-hand the challenges that excessive regulations create for small businesses. In 2012 she received the SBA’s Regional Minority Small Business Champion of the Year award.

In 2010, Alexandra and her mother incorporated Frontier 2000 Media Group to produce clean, wholesome, inspirational entertainment for families.She re-released No Regrets with a new foreword to the twentieth anniversary edition of the book updating readers on what her family is doing today. She is also co-author of four novels including The Fourth Kingdomwhich was selected as one of four finalists in the Christianity Today 2011 Christian Fiction Book Awards. Her solo novel, The Planner about the dangerous consequences of progressive big government and Agenda 21, was released in June of 2012. For more information visit her website at http://www.frontier2000.net